Welcome to 2024! We are about 4 weeks in and have been told that Inflation is coming down but still a problem. We are seeing a few more “layoffs” around the traps and the RBNZ came out early and said any predictions of rate cuts happening soon are misplaced.
Well, let’s see what happens.
If we rewind to my December wrap up email I made mention of the fact that we are already in the so–called “Soft landing” and that you aren’t going to see this govt handing out big pay rises. Well, just recently we got to see that in action.
The first Minimum wage increase of the new Govt was announced and it was a measly 2% increase. An increase is an increase, but on balance this is a historically low increase. You can think of this what you like but I know some small businesses that are not in a spot for taking on extra cost right now, so here’s hoping things brighten up out there.
Another of my mentions in December was as it gets harder economy wise, the need for credit to start flowing again will become important on a macro level for the country. I said that can only be done by reducing servicing costs (Lower interest rates) once wages slow. This is not 100% true. I purposefully left out the “reduction of red tape” because I am not one to believe that any govt reduces or removes laws. We have a history of adding to legislation not removing it.
But! This week we were told that some lending and credit regulation is going to be reviewed. Without going into detail. This can be a form of fiscal monetary easing. Simply put – Make it easier to borrow money, more people will go to borrow money, more money hits the streets to buy things. Although I have my doubts on anything being eased prior to rate cuts which I expect in the latter half of this year.
Next stop is the BIG ONE…. The implementation of DTIs or Debt to income ratios.
The RBNZ has been working on this for a while now, though more clarity was provided a few weeks ago about what they want to do and how they would like to regulate them. To summarize all the complicated jargon everywhere on this. They want to put maximum borrowing limits in place based on a multiple of how much you earn per year.
As some have correctly pointed out in the media. Right now a DTI of 6 or 7 x your household income would make absolutely no difference whatsoever in the current environment. With rates this high and banks still assessing clients around the 9% mark we can’t get that much borrowing for people anyway.
I read this tool as a bit of PTSD from the pandemic. Rates went to 2% to encourage economic stimulation and people could all of a sudden borrow 10x their income for a house, sending the housing market into an unprecedented spiral upwards.
If we speculate what would have happened if there were DTIs of 6 at that time I would say the rise in prices would have still occurred but certainly not as rapid or aggressively. Part of me also believes in human creativity and where there is a will there’s a way. So it’s hard to nail down a figure of accuracy.
If we then speculate on the future and imagine these rules are in place. I think the theory is if we have a hard recession at some stage. This will allow rates to be lowered to a point where it makes sense to borrow capital to invest in productivity but you will be restricted from leveraging up on the housing market.
I don’t think too much more than that, they also said they will allow more “low deposit” lending for home loans to occur. Which is a way to balance out the fact you wont be able to borrow as much in a low rate environment.
All in all the first month of 2024 has provided a lot to unpack but hopefully that helps keep things clear.
As always, if you have any questions in relation to lending, rates or repayments just sing out and we can get right to it.
